Couples need to invest in sync with goals

Three years ago, Varun Khowala, a manager with Industrial Finance Corp. of India Ltd now, led a carefree life. Like most other people his age, he took this attitude to his finances as well: whatever little he invested was to save tax. “You know how bachelors are. I didn’t think much about investments. Earning money meant I could spend it on things I liked. So whatever little investments I made was largely to save taxes,” says the 30-year-old. So at the end of the year, when his human resource department would demand tax proofs, he would rush to buy an insurance policy.

But marriage to Poonam, a chartered accountant by profession but a full-time mother right now, changed his attitude towards money. “Now when I invest I do so with goals in mind,” he says. Becoming a father a year ago helped this outlook further.

In the process, Khowala has got one thing right: his investments largely match his goals and tax saving is incidental. “I don’t wait for the last minute rush. My investments are distributed round the year. Now my investments are more in sync with my goals and tax saving is a secondary concern,” he says.

Khowala exhausts his 80C limit largely through investments in insurance policies bought earlier and Public Provident Fund and has mutual funds in his portfolio as well.

Says Nitin B. Vyakaranam, founder and chief executive officer, Artha Yantra, a financial planning portal, “People should realize that in order to save taxes they end up buying products that they don’t need and have to live with that mistake for the long term. Tax planning should not be different from financial planning. So you still need to assess your risk profile, chalk out goals and then approach financial products.”

In the second stage of life, when you are no longer a single, but are shouldering the responsibility of a family, the first priority should be fixing goals. We tell you how some tax-saving instruments fit into some common goals that couples typically have.

Protection

Life insurance: If you are married and have kids, life insurance is something you must consider. The premium that you pay qualifies for a tax deduction so long as the annual premium is at least 10 times the sum assured or the insurance cover. Here, term plans are the best options as they charge only for the insurance part. However, it’s a pure cover and offers no returns at the end of the tenor.

Insurance plans that promise to invest a part of your money usually fail to give you both a decent insurance cover and good returns. “Traditional endowment plans give 5.0-6.5%. Money-back plans offer 3.5-4.0%. In case of unit-linked insurance plans (Ulips), the charges have come down, but it makes sense to keep insurance and investment separate. By choosing to invest in mutual funds one can move from one fund to another,” says Suresh Sadagopan, a Mumbai-based financial planner.

Health insurance: This is a must for all times. Premiums paid towards a health insurance policy qualifies for a deduction of Rs.15,000 for an individual and Rs.20,000 for a senior citizen under section 80D. Your deduction doubles up if you also buy health insurance on behalf of your parents. So if your parents are below 60 years of age you get an extra deduction of Rs.15,000 and if they are older you get Rs.20,000. If your premium is less than Rs.15,000, you can claim a deduction of up to Rs.5,000 on account of preventive health check-up.

Here, too, stick to the plain vanilla health insurance plan that pays for hospitalization expenses. You could cover the entire family individually and get a family discount of up to 10% or go for a floater policy. A floater policy considers the entire family as one unit. So if one uses the sum insured, the cover reduces by that much on the others. Keep this in mind while choosing the amount of health insurance.

Long-term goals

Saving for the sunset years is one of the most important goals of your work life. For long-term goals such as retirement or higher education or marriage of your children, you should consider the following products.

Employees’ provident fund (EPF): For a salaried individual, the entry in the world of section 80C investment products begins with EPF. Every month, you and your employer contribute 12% of your salary in the EPF account. While it is mandatory for employees having a basic salary of Rs.6,500 per month, for those earning above that limit, the contribution is voluntary. The 12% that you contribute qualifies for a tax deduction under 80C up to Rs.1 lakh. EPF for now is returning 8.25% per annum, the rate for FY13 is yet to be declared. “The government-run EPF gives the best tax-free return. This can be used to partly meet retirement and children’s education goals,” says Veer Sardesai, a Pune-based financial planner.

Public Provident Fund (PPF): In 2011, returns on PPF became market linked. Now it is pegged to the average government securities (G-secs) yield of similar maturity of the preceding year and will have a positive spread of 25 basis points. The rate will be declared right before the start of a fiscal year. For this fiscal, the rate is 8.8%. Also you can completely exhaust your 80C deduction limit of up to Rs.1 lakh by investing in PPF.

Maturity proceeds are tax-free as well. In tax parlance, PPF is an exempt-exempt-exempt (EEE) product. Given the favourable tax treatment, PPF remains an attractive proposition for long-term savings for goals such as children’s education and retirement. But before you put the entire kitty of Rs.1 lakh in it, reflect on your asset allocation and risk appetite.

National Pension System (NPS): This is a long-term investment vehicle designed solely for retirement saving. It limits equity investment to 50% making it more suitable for balanced or conservative investors. Being a retirement product, it has a lock-in till 60 years of age. You can begin with a minimum annual contribution of Rs.6,000 in the funds and fund manager of your choice. Your contribution qualifies for a tax deduction up to Rs.1 lakh. On maturity, you can withdraw up to 60% as lump sum, the remaining 40% goes into buying an annuity, a pension product that pays you periodic income. The 60% lump sum you take is taxable as of now, but it is likely to enjoy EEE status soon.

“NPS is good in terms of low charges. But for someone who is aggressive, it offers only 50% equity exposure. Also, the maturity corpus is taxable, which makes it a lot less attractive. Hence, we do not suggest NPS in any serious way,” says Sadagopan.

Equity-linked savings scheme (ELSS): If you are planning for the long term and can stomach short-term volatility that stock markets bring to your portfolio, equity investments are a must for you. Investment in ELSS not only allows you to dabble in equities, it also offers a deduction of up to Rs.1 lakh under section 80C. You can either invest a lump sum or through systematic investment plans (SIPs).

In order to encourage first-time investors, the government has notified a new scheme called the Rajiv Gandhi Equity Savings Scheme (RGESS). This comes under a separate deduction limit of Rs.25,000 under section 80CCG. “The way it has been structured, there is not too much incentive as this is meant for a person earning up to just Rs.10 lakh. They would be in the 20% slab and their saving is going to be Rs.5,000 for investing Rs.50,000. Look at this scheme in the overall investment and goals context,” says Sadagopan.

Short-term goals

Short-term goals such as buying a car or saving for the downpayment of a house needs an assured income at the end of the investment horizon, which is again very short, from a year to up to five years. For short-term goals, equity investments should generally be avoided.

Look at fixed deposits (FDs) instead. There are notified FDs of tenor of five-year or more that also give you the 80C deduction. The interest is taxable though. So it works if you are in the lower tax bracket or need an assured income in the short term.

“You need to save for at least three years in any tax saving product. ELSS has the minimum lock-in of three years but what you need over the short term is assured income. You can choose between five-year FDs and five-year National Savings Certificate (NSC). The rate of interest on both is comparable. NSC scores over FDs in one aspect. The interest accrued is deductible if it’s reinvested next year. But if you have exhausted your 80C deduction limit, it doesn’t make any difference,” says Pankaj Mathpal, a Mumbai-based financial planner.

Chalk out your goals and then pick your investment products carefully. Next year don’t wait for the year end. Start from the beginning.